Standing Committee A

[Mr. Edward O'Hara in the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14, and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984)

Clause 18

Value of imported works of art etc: auctioneer’s commission

Amendment proposed: No. 2, in page 20, line 32[Vol 1], at end add
‘but not before 1st September 2006.'.—[Mr. Francois.]

Question again proposed, That the amendmentbe made.

Philip Dunne: The hon. Member for Wolverhampton, South-West (Rob Marris) was saved by the bell at the end of this morning’s sitting, having introduced the subject of sport into the debate. He was trying the patience—I imagine deliberately—of Opposition Members in a rather uncharacteristic attempt to suggest that they had been asleep during the Budget debate. He must have erased from his memory the entire debate in Committee on the Floor of the House in which the Opposition raised matters of great significance.

Edward O'Hara: Order. Is the hon. Gentleman speaking to amendment No. 2?

Philip Dunne: I am grateful to you, Mr. O’Hara, for bringing me on to the point of my remarks. However, having been unable to speak earlier, I could not resist responding to the point made by the hon. Member for Wolverhampton, South-West.
I support what was said by my hon. Friend the Member for Rayleigh (Mr. Francois) when he moved what is a pragmatic and sensible amendment. As we heard this morning, it is entirely supported by the art market. I want to make a practical observation to the Paymaster General if she is not aware of the way in which the art market works. It is a seasonal market. There are markets, typically in the summer months of June and July, that require a great deal of preparation, not least of which is the publication of extensive catalogues. Due to the complexity of the VAT regime in the art market, the catalogues have to refer to specific VAT rates and regimes that apply to each piece of art that is up for auction.

Helen Goodman: Like the hon. Gentleman, I have a rural constituency and can understand seasonality in agriculture. However, can he explain why the art market is particularly seasonal?

Philip Dunne: I do not profess to having any specific expert knowledge. I receive rather too many e-mails from art auctioneers for reasons that I cannot really understand, but they make me aware when sales are coming up. They have sales at times of the year when there are many visitors to London—London being the centre of the art market in Europe and a world centre—and they tend to be in June and July, months when other occasions, such as major sporting events, draw people to this country. The other popular seasons tend to be in the pre-Christmas period—in November and December—which again may be partly related to the fact that people enjoy buying Christmas presents at that time of year. There are well established seasons and because of the lead time for drawing up the necessary publications to make the market work properly, the provision cannot be introduced overnight without having significant repercussions on the normal working of the market. For that reason, I support the amendment.

David Gauke: I merely have a few questions for the Paymaster General about the clause, all of which relate to the amendment. What assessment has the Treasury made of the impact on the art market, as a consequence of the changes in VAT on auctioneer’s commission? What revenue will it gain as a consequence of the changes? Has it taken into account any harm that may be done to the art market in the United Kingdom?

Sadiq Khan: Does the hon. Gentleman accept that, rather than the change having an impact on the art market, issues such as rates of exchange may have more of an impact than seasonal variations?

David Gauke: That may well be the case, but as we are debating changes in VAT, I thought that I would raise that matter rather than any other factors.

Julia Goldsworthy: Will the hon. Gentleman accept that the issue is about compliance with a European Court of Justice ruling? The issue is not the negative impact that there may be on the market, but the fact that compliance is necessary.

David Gauke: The hon. Lady is absolutely right. Compliance is necessary, but we should none the less know the costs of that compliance. That is what I am asking about and, indeed, I may return to that subject later in our proceedings should I catch you eye,Mr. O’Hara.
Given that the changes are a consequence of a European Court of Justice judgment, what legal advice have the Government received saying that they were correct in their application of VAT rules? I ask that, because several Conservative Members have referred to legal advice in other contexts. Perhaps Ministers were a little dismissive by saying that they had always taken legal advice, but it seems that it is frequently wrong or at least a different interpretation is taken by the European Court of Justice. Will the Paymaster General explore that matter further?

George Young: I welcome the speech made by my hon. Friend the Member for Rayleigh when he moved the amendment. I am sure that it will make him even more welcome in Sotheby’s and Christie’s on his regular visits to those two great auction houses.
I want to pursue two points. I have no difficulty with the United Kingdom responding to the judgment of the European Court of Justice. Of course, we must do that. Will the Paymaster General say whether the speed at which we respond to such a judgment and this one, in particular, is comparable to the speed with which other countries respond when they are found tohave acted unlawfully? The date of the judgment was 25 February last year and we are putting the matter right under the Finance Bill. Can the right hon. Lady assure me that other Governments respond with similar alacrity when they are found to be acting outwith the remit of the European Court of Justice?

Edward O'Hara: Order. It is not within the terms of reference of the debate to ask the Paymaster General to speak for other Governments.

George Young: I understand that, but the amendment would delay the date on which we respond to the judgment. If we delayed, would that mean that we were more in line with the speed at which other countries respond to the European Court? Will it bring us ahead? I see that the right hon. Lady has the answer at her fingertips.
If we respond as proposed, will we be on a level playing field with other auction houses in Europe? In other words, have they also responded to any judgments against them? Will there be a level playing field in the auction house market within Europe when the clause is enacted?

Dawn Primarolo: I think that I can help the Committee. The matter needs to be put into context. It has not arisen simply because of an ECJ ruling, although that is part of the chain of events that led to the amendment. In 1973, when VAT was introduced in the United Kingdom, the Government at the time went for the option of not charging VAT on the importation of certain works of art, antiques and collectors’ pieces. However, when accepting the dossier, the then Government in negotiations on the seventh VAT directive, which was concerned mainly with the harmonisation of VAT treatment, agreed that, for a short time, the rate of VAT on works of art should be 2.5 per cent., rising automatically to 5 per cent. That is the position that we are in, and it was negotiated by the previous Conservative Government. Unfortunately, they failed to raise the issue of VAT treatment of auctioneer’s commission, the very subject that we are debating, when seeking a derogation. They missedthat out.
When this Government was elected, we automatically inherited the international agreement established by the previous Government, including their failure to apply for a derogation in that specific area. This Government agreed with the art market that auctioneer’s commission should be subject to the same rate. Unfortunately, the Commission did not.
A very long set of negotiations and disagreements then ensued between the Government and the Commission. A series of changes were also made in Finance Bills to try to ease the art market’s position, particularly in recognition of London’s importance on the international scene. We were taken to court, and we lost. We have an ECJ ruling against us now. The reason that we are here in the first place is a failure to apply for—a failure even to think to apply for—a derogation. 
The British Art Market Federation does not support the amendment. It recognises the difficult position that it and the Government are in. The BAMF has suggested in its discussions and negotiations—bearing in mind all the points made by the hon. Member for Ludlow (Mr. Dunne)—that 1 September would be a sensible starting date for the arrangement. [Hon. Members: “That is what the amendment says.”] No, the amendment does not say that.
A difficulty then arises, as the hon. Gentleman pointed out, with regard to how speedily the UK will be required to comply with the requirement that we have been disputing—we have lost the dispute at each point—since 1997. Technically, the starting date should be on Royal Assent, but having negotiated with the industry, we have made it 1 September. That is what the industry has asked for.
The amendment is not acceptable because it opens up a possibility that the Commission might interpret it unfavourably. It says,
“not before 1st September 2006”,
which implies that it could be later. Because it could happen on Royal Assent, the BAMF does not support the amendment, and did not ask for it to be tabled. The BAMF has an agreement with the Government, and that is the most sensible way to proceed after long and protracted negotiations. I pay tribute to art market representatives, particularly Anthony Browne, whom I have met. I am familiar with the brief because it has been on my desk since 1997.

Brooks Newmark: I am curious as to why the same Anthony Browne said:
“If this comes into force it will make the tax situation, which is already complex, even more complicated. Something that this country is good at is being thrown away by half-baked ideas in Europe.”

Dawn Primarolo: It is not surprising that Mr. Browne is against the changes. The Government and the art market have fought hard over the issue. It is a shame that the Conservative Government did not work as closely with the art market, a market that they now profess to support on the derogation.
I have said why it needs to be done within that period, and I have dealt with the matter of legal advice—and our advice is the same as the art market’s. I turn next to what the cost is likely to be to the art market. The only figures that I can provide are those provided by the British Art Market Federation, but we have absolutely no reason to dispute them.

Mark Francois: As a matter of fact, the British Art Market Federation was aware that we had tabled the amendment. I discussed it with the federation in some detail.
Is the Paymaster General saying that the likely implementation date is now the date of Royal Assent, or will it be 1 September? She mentioned both, and it would help the Committee if she were to say which of the two is the most likely.

Dawn Primarolo: The Government have negotiated with the trade for a starting date of 1 September. That is what we intend. I know that the hon. Gentleman has discussed the amendment with the art market, but I dispute whether the federation supports it. It knows the delicate position that we are in; we, too, have had the opportunity to discuss the matter with them.
I return to the matter of costs. The increase is not on the works of art but on the auctioneer’s commission. The federation estimates that the total implementation costs for UK auctioneers will not exceed £500,000. That is a reasonably large amount of money, but it is not substantial when compared with turnover and profits. The federation’s estimate of the total implementation costs for smaller businesses in the trade sector is about £50,000. As for income to the Government, it will be negligible—so small that no Government would calculate it. Additional support and help to the art market has been put in place under previous Finance Acts—the market already has that help—to try to counter some of the problems.

Philip Dunne: In direct relation to the helpful statistics that the Paymaster General is giving us, has she or the art market calculated the much more significant impact that the measure may have on business forgone—the art business lost to the London market?

Dawn Primarolo: It is clearly difficult to establish. We rely on the market for that information. It is a strong and important market; it is the central market in the European Union, and second only in the world—perhaps not even second. We are advised that the impact will be minimal. That was the Commission’s case; it said that it wanted to ensure a level playing field. The impact was minimal, and we were asked why we were moving heaven and earth to prevent something that would have a minimal effect. None the less, the Government did so.

David Gauke: The Paymaster General said that it was the Commission’s case that it would have a minimal effect. Was that case accepted by the Government during the hearing before the ECJ, or did the Government argue that it would not have a minimal impact?

Dawn Primarolo: The Government and the art market made a wider case than simply the likely cost. As I said, the Commission’s view was that the impact would be minimal, but that is also the view of the art market. I am not familiar with the issue although over the years I have had the benefit of meeting people such as Anthony Browne. As hon. Gentleman can guess, currency exchange rates and other factors will have a far greater impact on the market than will this tiny change by the Commission.
The Government and the art market argued for the need to maintain global competitiveness—the London market vis-Ã -vis the world market. The Government have moved on that, and I can send the hon. Gentleman details of those changes designed to counterbalance the question of competition, but it would not be appropriate to stray on to that matter now.

David Gauke: Was it therefore the Government’s case that the measure would have a major impact on the competitiveness of the London art market? To what extent does the Paymaster General still believe that that will be the case?

Dawn Primarolo: The Government supported the art market by recognising that it had been an omission not to apply for a derogation at the appropriate time and that there was therefore an obligation to assist in whatever way possible. Given the size of the market, the small change that the measure makes will not have a significant financial impact. However, we were keen to be seen to defend what is a premier market based in London—we believe that the citizens of this country would expect us to do that—and that is precisely what we did.
On that basis, I hope that the hon. Member for Rayleigh will not press his amendment, but if he does, I shall ask my hon. Friends to oppose it.

Edward O'Hara: Before I put the question on the amendment, I should like to say that again it has been difficult to talk to the amendment without talking also to the substance of the clause. I intend therefore to move clause stand part formally without further debate, so if hon. Members wish to make any further points they should make them now.

Philip Dunne: I should like to comment on the clause. There appears to be an agreement on both sides of the House about the fact that this is a regrettable step forced upon the Government by the European Court. Despite the agreement that we should not be implementing the measure, the Paymaster General has ingeniously succeeded in blaming the previous Conservative Government and rubbished my hon. Friend’s amendment, even though she made it clear that she agrees with its substance. As has happened previously, we appear to have lost the battle but won the war.
The measure in the clause is seemingly innocuous. We have heard that the impact on the art market is likely to be minimal, but I fear that it could be more significant. As I said, I am not an expert, but I have done a little research and as I understand it some£3 billion to £4 billion-worth of transactions are made in the London art market every year. Most of that goes through Sotheby’s, Christie’s and Bonhams. It is a very mobile market. We are talking about works of art imported into this country to be put through those auction houses. Typically, the consignments of those works of art come from the United States or non-European vendors. They have the opportunity to keep the artworks in the United States and sell them in New York or send them to Switzerland. I suspect that the drip-drip nature of the obstacles to vendors selling their works in London is likely to encourage other markets, such as the one in Geneva.
Just to give hon. Members some idea of the scale of the consignment from overseas that would be affected by the measure, I understand that in January, at the impressionist art sale—which happens twice a year, seasonally, although I cannot tell what the other month is: it may be July—88 per cent. of the lots sold at Christie’s and 72 per cent. of the lots sold at Sotheby’s were bought by Europeans, who will now be caught by this increased rate of VAT. The vast bulk of the buying side of a market—there are always two sides to a market: the seller and the buyer—is based in Europe and will be subject to VAT. A large proportion of the sellers can choose whether they wish to use this market or one that is not caught by the increased charge. That is potentially significant. I do not know whether the Paymaster General had representations from the VAT specialists at Grant Thornton, but Paddy Behan was quoted as saying that he believes that this
“will have a major impact on the standing of UK auction houses.”
We have heard some relatively complacent remarks from the Paymaster General. I hope that she is right and the measure has a minor impact, but I am fearful that it may not. That is yet another example of the European Commission seeking to introduce creeping tax harmonisation through this measure—something that is regretted on both sides of the House—which we should resist at every level. I appreciate what the Paymaster General said—[Interruption.] If the hon. Member for Wirral, West (Stephen Hesford) wishes to intervene, I should be happy to let him. No; he is just making sedentary sniping remarks.

Mark Francois: We have had a useful opportunity to air this subject. I thank the hon. Member for Wolverhampton, South-West (Rob Marris) for complimenting me on being so quick off the mark in getting my amendments tabled. It is always nice to receive a compliment from him; I shall bank it for the future. I am also grateful to the Paymaster General for her reply. At times, her tone was a little unnecessary, but I listened carefully to what she said.
I have heard your guidance, Mr. O’Hara, about this debate effectively becoming a clause stand part debate. I have one further point to make in that context before returning to the amendment. This may appear to some to be a relatively minor measure, but it has to be considered in the context of a number of pressures on the United Kingdom art market in recent years, not least the droit de suite issue, which I do not propose to expand on at length this afternoon. Nevertheless, that has been a major challenge to the art market—or will be in the next few years. It is also, beyond peradventure, an issue on which the market has absolutely not been at one with the Government—in fact, precisely the opposite. The Government have enraged the art market by the way in which they dealt with that measure and by going beyond what was required to make the problem worse. If the Paymaster General is attempting to intimate that there is a cosy relationship across the board with the market, that is not quite correct—although I concede, for the avoidance of doubt, that on this issue the Government attempted to take a robust view.
I should like to quote again from Mr. Anthony Browne’s letter about the wider issue:
“We consider that the ECJ judgment, unhelpful as it is, is not the fault of the British Government. It is, none the less, a further example of the way in which the international competitiveness of the British art market, by far the largest in the EU and Europe’s only global art market, is being eroded by EU legislation.”
There is an important distinction to make. I reiterate the BAMF’s point that it is grateful for the dialogue with Her Majesty’s Revenue and Customs and its officials. I hope that we have used this opportunity to air the matter responsibly.
Returning to the amendment, I heard the Paymaster General give two commitments in her remarks. First, I am grateful that she reiterated that this change will apply only to auctioneer’s commission, not to the hammer price of the object. She mentioned that, and I listened carefully. We asked her to reiterate that to avoid doubt. She has done so, and I thank her.
We come to the date itself. In some ways, it was a rather curious debate. We tabled an amendment that said that the measures could not come into effect until 1 September. The Minister said, “I don’t want to accept that, because we’re going to bring in the change on 1 September.” We are almost in danger of being in what the Americans call “violent agreement.”
The Minister has assured us that negotiations appear to have progressed successfully and the measures will not come in until 1 September. The market will have time to prepare. The change will not come in mid-season and cause the disruption that we discussed. Therefore, under the circumstances, it seems that the matter is being reasonably dealt with all around. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 18 ordered to stand part of the Bill.

Clause 19

Missing trader intra-community fraud

Julia Goldsworthy: I beg to move amendmentNo. 58, in page 21, line 6 [Vol 1], leave out from ‘(10)' to end of line 10.
This is a probing amendment relating to an addition to section 55 of the Value Added Tax Act 1994. Proposed new section 55A(1)(d) mentions
“the total value of the relevant supply, and of corresponding supplies made to the recipient in the month in which the relevant supply is made”
in excess of £1,000, which is referred to as “the disregarded amount”. The amendment seeks to remove that last part, following representations from the Institute of Chartered Accountants in England and Wales and the Law Society, which raised queries about setting the sum at £1,000.
The matter is quite simple, and it raises a question of practicality. The measures will affect only businesses with a turnover of £60,000 to £61,000. Will the Minister clarify the rationale behind setting the disregarded amount at £1,000? Is that threshold sufficiently low to avoid costs for business? If it is to be set at £1,000, should there be a threshold at all, or is there a case for setting it higher? I would appreciate the Minister’s comments on the rationale behind the measure.

Mark Francois: I shall confine my remarks to the amendment, as I am keen not to prejudice the broader stand part debate on this rather important clause.
I have listened carefully to the argument that the hon. Member for Falmouth and Camborne (Julia Goldsworthy) made in favour of her amendment, but I am not convinced by it. The clause will give HMRC quite a strong power to impose the reverse charge procedure, which could be a useful weapon in the battle against missing trader intra-community fraud, but which will represent quite a change in VAT terms for those companies on which the order might be imposed.
The element of the clause in question effectively provides a safeguard for small businesses in particular by instituting a de minimis level below which the power should not apply. If it were deleted, the procedure could be imposed even on companies reclaiming a very modest amount of VAT. Indeed, some professional bodies have claimed that the threshold should be raised.
I am curious that the hon. Lady quoted from the Law Society. I read its brief; perhaps I read it slightly differently. It said:
“We appreciate that repeated transactions involving loss of VAT on supplies just below an increased threshold, e.g. £10,000 a month, would give rise to material losses of VAT. However, the aggregation provisions in the new section 55A(1)(d) enabling other supplies to be taken into account—e.g., if a customer has already received (on the current legislative proposals) supplies of £200, the new provisions will apply to other supplies which individually or in aggregate exceed £800—might suggest that a higher threshold could be adopted.”
Unless I completely misread that, the Law Society is saying that, if anything, the threshold should be higher, presumably because it would like the safeguard to be broader than it is.

Julia Goldsworthy: The Law Society also questions whether the £1,000 threshold is sufficiently low enough to avoid costs for business.

Mark Francois: I read the paragraph. It said that at one point and then it referred to what I have brought to the Committee’s attention. I do not want to be critical of the Law Society, but perhaps that is the first time ever that a lawyer has given contradictory advice. However, I am clear about what it said in the paragraph to which I referred. I appreciate that there is an argument for simplicity. Retaining the element in the Bill, in a sense complicates it because it adds a provision that would otherwise not exist. However, it is a potential safeguard, particularly for smaller businesses. I shall return to that theme in some detail in the clause stand part debate. As the element is a safeguard and will protect smaller businesses in certain circumstances, it should probably be retained. The hon. Lady said that the proposal was a probing amendment, so I do not anticipate a Division. However, if there were one, she could probably guess the outcome.

Rob Marris: I declare an interest. I am a member of the Law Society of England and Wales, although I am a non-practising solicitor. The Law Society briefing to which the hon. Member for Rayleigh referred is not contradictory. It states:
“We question whether £1,000 is a sufficiently low threshold to avoid costs for business.”
I tend to agree broadly with the hon. Gentleman. The amendment is an extraordinary amendment, albeit a probing amendment. It seems to be based on a submission by the Law Society, which said that, if anything, it should be a higher threshold, whereas the hon. Member for Falmouth and Camborne, in her albeit probing amendment, wants to get rid of the threshold. That seems an extraordinary reaction to the brief, which she prays in aid. She has completely misread it.

Mark Francois: As the hon. Gentleman is a member of the Law Society, and partly to justify his annual fee, I thank him, on its behalf, for clarifying the matter. He has now made clear, beyond peradventure, what the Law Society intended.

Rob Marris: The hon. Gentleman is in danger of overusing the word “peradventure”. He has used it twice today and he used it on multiple occasions in Committee on the Floor of the House. My annual fee is, I think, £25.

David Gauke: I wish to correct the hon. Member for Wolverhampton, South-West. I think that his fee will be £20, because I have just sent off my fee to the Law Society to stay on the roll as a non-practising solicitor. [Interruption.] It is a bargain if we do not have to go through law school again as a consequence.
I wish to add to the eloquent words of the previous two speakers. The Law Society brief is questioning the sum of £1,000 as being too low. It is an important safeguard, but there is a strong argument for raising the sum. The reference to the briefing provided by the Institute of Chartered Accountants of England and Wales certainly calls for a probing amendment. However, the reference is seeking clarification of the rationale for the disregard. I have no doubt that we will receive such a clarification, but the argument is whether a £1,000 threshold is sufficient, not whether there is a need for a £1,000 threshold at all.

Dawn Primarolo: I am grateful to the hon. Member for Rayleigh for explaining the Government’s legislation to the hon. Member for Falmouth and Camborne. The hon. Lady said in her introduction that the proposal was a probing amendment. The question of a reverse charge and its impact on small businesses is a matter that we should be worried about. Although that is a wider debate, it is important to say that the reverse charge that the Government are suggesting is specific in certain areas. It is not a general reverse charge across VAT. It is important, as we discuss the clauses, to remember that.
Why set the threshold at £1,000? All the arguments have been made not to have it set at any level, which would mean that all businesses would be caught. That is the Government’s current thinking, but it is subject to discussion. The disregard of £1,000 reflects the maximum level of purchases of goods subject to the reverse charge that an unregistered business is likely to make if it is engaged in legitimate business activity. I hope that that is clear to every member of the Committee.
We are worried that if, at this stage, we set it at a higher level than £1,000, we could suffer significant revenue losses. I shall not touch further on the matter, because it should be debated either under clause stand part or under the next amendment. The current view is that £1,000 is reasonable. We are considering specific sectors in which the missing trader fraud is at maximum, not across the whole of trading in VAT. Within those sectors there will be small, unregistered businesses, and we are seeking to protect them. A small business with a turnover of £40,000 would expect to purchase between £7,000 and £8,000-worth of goods a year in the relevant categories. We are talking about, for example, computer chips and mobile phones, of which a small, unregistered company will buy only so many in any one year. That is our current thinking, that is the information that we have, and that is why we have set that level.
Let me put in a caveat in recognition of the fact that the amendment is a probing amendment. Businesses accept the principle of the reverse charge, but the detail is important. If our discussions confirm that £1,000 is too low, we are prepared to consider reviewing it before implementation; that is why we consider it to be appropriate at the moment. We have looked carefully at the sector and at the type of demands of the businesses. On that basis, I hope that the hon. Lady will withdraw the amendment.

Julia Goldsworthy: We have heard that it is difficult to strike a balance between safeguarding smaller businesses and protecting revenues. It has been acknowledged that there is a question mark over the appropriateness of the £1,000 disregard level, whether it will catch the right businesses and whether it will make a sufficient impact on revenue. Ultimately, the reverse charge is welcome. We will deal with that in the stand part debate. I beg to seek leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part ofthe Bill.

Mark Francois: We now come to four interrelated clauses in part 2. They are grouped together under the subheading “Avoidance and fraud”. I should explain that, following our debate on clause 2 on Tuesday, I decided not to move our amendment No. 3 which would have introduced an additional sunset clause with regard to the adjustment of output tax. On reflection, I thought that it might be easier to take the whole debate in the round in the context of the clause stand part debate. That was the rationale, because this is an important clause.

Dawn Primarolo: I understand the hon. Gentleman’s point. None the less, his amendment No. 3 touched on an issue that would not have been in dispute between us. Perhaps, although there is no sunset there now, we can cover the intention in terms of the longevity of the clause.

Edward O'Hara: That was a missed opportunity.

Mark Francois: I suspect that, procedurally, all sorts of opportunities are still available. Clauses 19 to 21 are closely related. In a moment, I shall speak to clause 20 and the powers of inspection. Afterwards, when we move on to clause 21, I should like to raise some questions about the extent of the powers to tackle fraud because some of those provisions are very broad indeed.
On clause 19, the missing trader intra-community—MTIC—fraud is a growing problem, of which the Government have been aware for some time. In 2001, a paper, published jointly by Customs and Excise—as it was then known—and the Treasury, entitled “Tackling Indirect Tax Fraud”, defined MTIC fraud in the following terms:
“VAT intra-Community missing trader fraud is a systematic criminal attack on the VAT system, which has been detected in many EU Member States. In essence, fraudsters obtain VAT registration to acquire goods VAT free from other Member States. They then sell on the goods at VAT inclusive prices and disappear without paying over the VAT paid by their customers to the tax authorities. The fraud is usually carried out very quickly, with the fraudsters disappearing by the time the tax authorities follow up the registration with the irregular assurance activities.”
That is a definition of the problem.
The 2002 pre-Budget report provided an update on the evolution of VAT MTIC fraud by breaking it down into two main types: acquisition fraud and carousel fraud. The report delineated the two types:
“Acquisition fraud is where the goods are imported from the EU into the UK by a trader who then goes missing without completing a VAT return or an EU Intrastat declaration. The ‘missing trader’ therefore has a VAT free supply of goods, as they make no payment of the VAT monies due on the goods. He sells the goods to a buyer in the UK and the goods are available on the home market for consumption.”
“Carousel fraud is similar to acquisition fraud in the early stages, but the goods are not sold for consumption on the home market. Rather, they are sold through a series of companies in the UK and then re- exported to another Member State, hence the goods moving in a circular pattern or ‘carousel’.”
It went on:
“Carousel fraud is currently regarded as the dominant type in terms of loss of government revenue...The fraud is not exclusive to the UK. Because these VAT arrangements apply throughout the European Union the fraud can be perpetrated between any two or more Member States.”
By nature, carousel fraud has tended to focus on low-bulk, high-value goods such as mobile phones and computer chips, but there are indications that it is spreading to other forms of merchandise including items as diverse as razor blades, nappies and—I am reliably informed—patio heaters.
The problem has become so widespread that the Office for National Statistics now adjusts the UK’s trade statistics to take into account the estimate of MTIC fraud. In February 2006, it published a note that confirmed that the interpretation of the effect on EU trade had been made more difficult by the spread of the problem in recent years. As the ONS pointed out recently, by definition, the extent of such fraud is difficult to measure accurately.
In a press release on 26 January 2006, HMRC estimated that UK VAT losses from MTIC fraud were between £1.1 billion and £1.9 billion for the 2004-05 financial year. Unfortunately, the situation appears to be deteriorating. Just last month, the Government announced the first annual fall in VAT revenues since the UK first started collecting it in 1973, largely because of the significant rise in estimated carousel fraud.
On 25 April, an article in The Guardian entitled “Fears over fraud as VAT receipts slump” reported that there is
“no doubt that MTIC fraud is huge and the Treasury is losing a massive amount.”
The article went on to quote a Government source that claimed that losses are rising rapidly and stated:
“It is a growing problem that can’t be ignored. It appears that the fraud keeps mutating to counteract the measures which we are taking against it”.
Similarly, on 27 April 2006, Robert Lee, writing for the website Taxnews.com, stated:
“According to the Office of National Statistics, carousel fraud has become so prevalent that it is distorting the UK’s trade figures. In a report issued last year, the ONS warned that trade figures for April, May and June 2005 would have to be reassessed after it noticed a suspicious surge in exports of mobile phones and computer chips to non-EU countries.”
We have a definition of the problem and at least some idea of its extent.
The Government’s solution under clause 19 is to introduce the so-called reverse charge procedure for certain categories of goods that can be specified by secondary legislation. It is intended to combat the fraud by passing the duty to account to the Government for the VAT further down the chain to legitimate businesses. The HMRC press release of26 January 2006 outlined the process and the decision that the Government had decided to adopt. It explained:
“Under the reverse charge procedure, the suppliers of the goods do not account for the VAT on their sales when selling to other VAT registered businesses—instead, it is the responsibility of the purchaser of the goods to account for the VAT, although they can recover this VAT in the normal way. This means that HM Revenue & Customs is not put in a position where it may have to make repayments of VAT where the corresponding tax on the purchase has not been paid to HMRC.”
A similar procedure was adopted some years ago to combat missing trader fraud in the gold bullion market, and apparently with some success. The intention is to apply the same procedure under the Bill. It is clearly a significant problem and something must be done about it.
I wish to ask the Paymaster General some specific questions about the matter, after which I shall speak briefly to our amendment. First, how confident are we that we now have a reasonably accurate quantification of the problem? We have an estimate for 2004-05 of up to £1.9 billion being lost to the Exchequer. Do we have a provisional estimate from the pre-Budget report or elsewhere of the figure for 2005-06, now that that financial year has come to an end? I appreciate that, by definition, the matter is not a precise science, but have the Government updated their 2004-05 estimate in any way that be used to inform the Committee?
On the other side of the ledger, in terms of projected savings from the initiative, the Red Book estimates that the new measures will save £100 million in 2006-07, £500 million in 2007-08 and £425 million in 2008-09—just more than £1 billion in a little over three years. Will the Paymaster General say on what evidence those estimates are based? There must have been some rationale for the calculation. The Committee would find it helpful to know the evidence.
Secondly, why has it taken the Government so long to react to the problem? It was identified in the HM Treasury and Customs and Excise paper that I cited earlier and that dates back to 2001. It was reiterated in the pre-Budget report in 2002. Now that we are in 2006, will the Paymaster General explain why, given the size of the loss of revenue, it has taken the Government so long to take definitive action against the problem?

Stephen Hesford: Does the hon. Gentleman not recall that he said that the fraud was something of a moving target and that it has been mutating? No doubt the Treasury has been watching it mutate and has taken that into account when bringing forward such measures.

Mark Francois: The hon. Gentleman has half a point. We know that the fraud has been mutating and that there is a constant battle between what is now the HMRC and the fraudsters. We know that the fraud is highly organised, as I shall explain in a moment. However, given the scale of the losses that we now face, the Government could have taken firmer action earlier. To put it simply, if the problem has reached a stage at which it is now affecting our official trade statistics each month, surely we should have done something about it earlier. That is not an unreasonable point to make.

Jeremy Wright: I want to point out to my hon. Friend for his assistance, and perhaps through him to assist the hon. Member for Wirral, West, that, when I was practising law in 2002, it was clear knowledge among the legal profession that the problem was large and growing. In fact, in the geographical area in which I worked, one solicitor practised only in the field of carousel fraud primarily through the sales of mobile phones. The problem was clearly known about in 2002.

Mark Francois: My hon. Friend, with his direct legal experience, confirms my point. We should be interested to hear from the Paymaster General why it has taken the Government such a long time to react to the matter. I am sure that she will want to provide us with an answer, and I look forward to hearing it.
The solution depends on the Government obtaining a derogation from the sixth VAT directive in order to apply the reverse charge in situations for which it was not originally envisaged. Will the Paymaster General update the Committee on the progress in seeking that derogation? In a written statement a few days ago, the Chancellor revealed that the VAT issue had been raised at an ECOFIN meeting on 5 May. Did that discussion include MTIC fraud and the progress of the necessary derogation? It seems that there was an ideal opportunity in the margins of the meeting for the Chancellor to have pressed the case with his fellow Finance Ministers. Did he do so, and if so, what were the results? When do Ministers anticipate that they will be in a position to issue the orders to implement that element of the strategy? On a directly related point, given the history of negotiations with our EU partners in recent years, what is the Government’s plan B if for any reason the derogation is not granted? What will they do then?
The provision is intended to be only part of the strategy to combat MTIC fraud. It is an important part of it, but as I am sure the Paymaster General will emphasise, it is only one part. On 26 January 2006, in reply to a series of questions from my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke)—who might seek to catch your eye on the matter,Mr. O’Hara—the Paymaster General stated:
“In order to strengthen further our strategy to combat VAT fraud, the Government have made an application to the European Commission (EC) for a derogation from the provisions of the EC sixth VAT directive to enable it to introduce a reverse charge procedure for transactions between VAT-registered businesses in certain goods. The Government consider this measure to be a proportionate response to MTIC fraud. This is only one facet of a comprehensive strategy designed to thwart MTIC fraud by taking the criminal profit out of the transaction.”—[Official Report, 26 January 2006; Vol. 441,c. 2268WS.]
Will the Paymaster General say more, at least in general terms, about what some of those other complementary measures are? Will she give the Committee some idea of what effect they are having on the problem, if any, other than the effect that she believes the reverse charge procedure will have if we agree to clause 19?
As the problem clearly affects other EU member states as well as the UK, what are other EU countries doing in response to the challenge? The HMRC’s press release of 26 January 2006 said:
“MTIC fraud is not a problem experienced solely by the UK—it also affects many other EU member States. The UK is working closely with the Commission and other member states to strengthen administrative cooperation, information exchange arrangements and the sharing of best practice.”
That being the case, are there any additional lessons that we can import from our European partners in dealing with the problem? They have obviously considered it too. What have they learned, and are any lessons applicable to us?
The scale of the fraud is growing. It is clearly a sophisticated operation often carried out by organised gangs that, particularly in the case of carousel fraud, operate systematically across borders. MTIC fraud is in many cases a serious and organised crime. That being so, has the HMRC sought assistance in addressing the problem from the Serious Organised Crime Agency? Are there any plans to increase SOCA’s involvement if the problem continues to worsen? It is a reasonably timely question. I heard just this morning on the “Today” programme that the Security Service is about to cede its anti-fraud responsibilities to SOCA. MI5 has decided to give SOCA the responsibility for fighting fraud. Is that mirrored to any extent by the HMRC?
We tabled our amendment to introduce an additional safeguard into the Bill. I am delighted to hear that the Paymaster General thought that that was reasonable, and that she was minded to look favourably on its provisions. I thank her for that generous offer, and I assure her that before the Bill is complete, we shall take her up on it.
The fraud is serious and appears to be growing. It is perpetrated increasingly by international organised gangs. According to the Treasury itself, it is now leading to a fall in our country’s VAT receipts for the first time since 1973. We are being asked to approve strong powers to make orders that will affect the supply chains of things such as mobile phones and computer chips, and also—theoretically, if we allow the clause to become part of the Bill—other areas of business if Ministers deem it appropriate, by order, to designate them. We should not underestimate the power of what we might be going to do this afternoon. 
Before we grant the Government that considerable power, can the Minister answer the following questions? What is the latest available estimate on the extent of MTIC fraud in the United Kingdom? Why has it taken the Government so long to do something about it? What is the current status of the regress for a derogation, and what is plan B if that derogation is not granted? What else is being done in the meantime, domestically, to combat MTIC fraud? By way of comparison, what are our EU partners doing about it and what lessons have we been able to learn from them? What involvement, if any, will SOCA have in the process?

Julia Goldsworthy: As we have heard, this set of clauses is designed to introduce powerful measures to deal with a big problem. Without going over the definitions that we have already discussed in relation to MTIC fraud, it is worth emphasising the scale of the problem. Figures from City analysts dated April 2006 suggest that as much as £10 billion in revenues could have been lost to the Treasury last year. The extent of the fraud is so great that it distorts the official figures that are used by the Chancellor to show how successful the economy is. That £10 billion represents 5 per cent. of exports, so there is a significant problem that needs to be tackled.
There are two areas in which HMRC has significant problems. The first is that VAT registration requests are not properly scrutinised by somebody with local knowledge. That makes it easier for people to get VAT registration in the first place. The second, which makes it difficult for HMRC to overcome trouble, is that prosecuting such frauds is difficult. It takes 18 months to two years before an arrest is made and another year for a case to come to court. When it does come to court, it is complicated. Juries are often faced with multiple defendants and have to try to work out who is involved in a scam and who is innocent. There are significant problems, and the industry has generally given a warm welcome to the concept of a reverse charge that will help it to overcome some of them.
Despite that, representations have been made to me about potential unintended consequences. The first concerns innocent traders who are within the payment on account regime, or whose turnover means that they are close to the threshold for having to make the payments. The payment on account regime requires businesses with an annual VAT liability of £2 million or more to make monthly payments to HMRC in respect of their VAT liabilities, the calculation being based on their actual liability in the preceding year. The businesses that will be affected in this case are those selling relevant goods to the public or purchasing goods such as microchips—

Dawn Primarolo: The hon. Lady heard the explanation as to what MTIC fraud is. There is no real activity. It is the circulation of exactly the same goods through a long chain of bogus companies that are used as a vehicle to reclaim VAT. I am struggling with the concept that there could be an innocent party in that chain. Can she explain how an innocent can be caught in a fraudulent chain of activity of that type?

Julia Goldsworthy: I can go into a lengthy explanation if the Paymaster General wants me to. [Hon. Members: “Yes.”] Okay. In its simplest form, at least one business in a supply chain has to exist so as to facilitate the MTIC fraud—that is how it works. It never has any intention of paying any VAT to the Government. Usually, the fraudulent business will aim to turn over as much money as possible within about six months and then disappear with the VAT. Most fraudsters are aware that a second missed quarterly VAT return submission will ring alarm bells, and that a VAT officer will be sure to visit shortly afterwards.
For example, business A is resident in the European Community, and businesses B, C and D are resident in the UK.

Rob Marris: Can the hon. Lady tell us who supplied the brief that she is reading?

Julia Goldsworthy: This example has been given to me by representatives from PricewaterhouseCoopers.
Would the Paymaster General agree that in every case where MTIC fraud has been prosecuted, every person has either been found innocent or guilty? There are no cases where businesses involved in the prosecution have not been found guilty or innocent. I could carry on with this example if she would like me to do so. I was trying to refer to innocent traders within the payment on account regime who look likely to receive a negative impact; they would be affected because they are either selling relevant goods to the public, or purchasing relevant goods for incorporation into goods, such as computers, that are not defined as relevant goods. The impact is that many innocent businesses are likely to have pay more VAT to HMRC than they would otherwise have to. Is that an intended consequence of the clause?
The second issue relates to concerns about where the responsibility lies: is it the taxpayer’s or the state’s responsibility to identify and deal with fraud? I understand that the European Court of Justice has already commented on that. How do the Government reasonably expect taxpayers to judge that their customer is registered for VAT, when the ease of fraudulently registering for VAT has already been explained? How will the supplier know that the customer will use their goods for business purposes? If the test fails, the supplier is still liable to pay HMRC the VAT, even if they neither charged nor received it. If the Government expect a legal challenge, how do they plan to deal with it? There are concerns that some provisions will make innocent bystanders pay for the crimes of others, which will lead to injustices and court cases, and could potentially lead to defeat for the Government.
Finally, there are concerns that the list of relevant supplies will lead to the cat and mouse situation that we see in other issues relating to tax fraud. Will fraudsters always ensure that they use goods that are not within the provisions of the clause? We already know that the services industry, for example, looks likely to be another potential growth area for this type of fraud. There is still plenty of scope for concern regarding such fraud, although the clause, which is attempting to tackle it, is welcomed by all.

David Gauke: It is fair to say that there is a desire from all parties to address this serious issue of MTIC fraud. My hon. Friend the Member for Rayleigh quoted some Treasury figures on the cost being in the region of£1.1 billion to £1.9 billion. I should be interested to know whether the Paymaster General has any further advance on that.
I notice the spirit of co-operation with regard to the clause and the fact that the Government would have accepted my hon. Friend’s amendment. I fear, however, that that does not mean that my hon. Friends on the Front Bench will be failing to move any further amendments during the entire course of these proceedings. That may disappoint a lot of hon. Members.

Dawn Primarolo: The moral of this lesson is that perhaps I should mention it next time, to be extra helpful.

David Gauke: We are all learning something this afternoon.
Before returning to the specific details of the clause, I should like to consider the general context of the measures taken by the Government with regard to dealing with MTIC.
The Paymaster General was a little bit dismissive about the issue of innocent bystanders. I should like to give one example of an innocent bystander, a constituent of mine, who came to my surgery to complain that he wished to establish a company importing electronic goods—I have no reason to doubt his honesty and sincerity—but was finding it difficult to open a bank account, because of the pressures that appear to be put upon banks to identify MTIC fraud and deal with it. That may be right, but there appears to be a difficulty for businesses in a particular area. I should be interested to know whether the clause would have any impact on that.
My hon. Friend asked the Paymaster General to elaborate on the general strategy for dealing with MTIC. I suspect that one issue that the Paymaster General will mention is new security procedures for obtaining VAT registration. I wish to quote from an e-mail that was sent to me, which has been circulating around several law firms on that point. It states:
“The new security procedures do not start until HMRC is satisfied that it has all the necessary information to support a registration application, so that it can allocate an effective date of registration. It is at that point that the papers are sent to a new team in HMRC who will carry out the new checks. They may take less than eight extra weeks but currently that is how long they are taking.
This means that the time it might take to get a VAT registration is really open-ended. I have an application in”—
this is from a specific lawyer—
“that was made on 16 February 2006. It was agreed on 18 April but might now take a further eight weeks. That will be17.5 weeks.
This is an appalling lack of service in the guise of protecting the taxpayer from fraudulent businesses but there is very little that we can do about it”.
The e-mail goes on:
“It has been suggested to me by HMRC that this is the result of a chronic absence of resources and that any external pressure to improve things would be welcomed”.
I take the opportunity to exert some external pressure on the Paymaster General because if we are to try to tackle VAT fraud—we all welcome such action—it is important that it is not done in a way that will make the life of innocent businesses much more difficult. The HMRC attempted to take the further step of refusing to pay out to companies that were claiming VAT when there was a suspicion or, indeed, proof of carousel fraud occurring. I refer to the Optigen and the Bond House cases, in which neither of the claimants had been convicted of any offences or fraud. From what the Paymaster General said earlier, I can see what her attitude would be to the companies, but perhaps I should not spend too much time on that. The companies were not convicted of fraud, but there was a fraudulent element somewhere within the carousel. The ECJ determined that it was not reasonable or legal for the Government to do that. That decision has had an impact on the Government and I accept some sympathy for them on that specific point because the strategy was impacted by the ECJ.
Is it possible to estimate the cost to HMRC of the judgment and the fact that the strategy could not be pursued? I ask that in the context of a report in the Financial Times on 5 May which stated that the High Court has granted permission to 150 companies to bring a class action in respect of the matter. Does the Treasury have a feeling of what the overall cost would be?
I presume that legal advice was obtained by the Treasury and HMRC. I see the Paymaster General waving a piece of paper, so presumably it would be in compliance with European law and the VAT directives to refuse to pay out the VAT claims to the various companies? Clearly, the legal advice was at variance with the judgment of the ECJ. That appears to be a theme that comes up fairly frequently.
The hon. Member for Falmouth and Camborne has already dealt with certain matters, but I had wanted to ask about the £1,000 disregard, and whether there is any flexibility with regard to that.
My next point concerns new section 55A(6), andin particular the fact that it states that in the circumstances in which the reverse charge applies, it is for the recipient, on the supplier’s behalf, to account for and pay tax on the supply, and not for the supplier. The words “on the supplier’s behalf” suggest some kind of agency arrangement. I should be grateful for further clarification. In circumstances in which the recipient fails or is unable to pay the tax for whatever reason, is there any ongoing liability for the supplier? Looking at subsection (7), it would appear not, because it refers to the relevant enforcement provisions that apply for the purposes of the section to any person required under subsection (6) to account for and pay any VAT as if that VAT were VAT on supply made by him. That is referring to the recipient. However, it is not followed by words that one might expect, such as “and not for the supplier”. I think that, taken as a whole, the clause means that in the circumstances that I describe the supplier has no responsibility. However, I should be grateful for the Paymaster General’s comments.
My next comment echoes a point that was made by the hon. Member for Falmouth and Camborne on subsection (6)(c)—the test that a
“recipient is a taxable person at that time, and is supplied in connection with the carrying on by him of any business”.
Those are potentially difficult things to check. One would assume that in relation to
“a taxable person at that time”,
one could check whether the person in question had a VAT registration number. However, given that a lot of the problems are caused by the fraudulent use of VAT registration numbers, that could be a difficult test. As for the second element, supply
“in connection with the carrying on by him of any business”,
I should be grateful to know the Paymaster General’s view on whether that would cause any particular difficulty. If it is an impossible proof, we could face legal difficulties.
My final point concerns subsection (9), which refers to the power that the Government will have to specify the goods to which the section will apply. There are two contradictory points that might be made about that. The first is that carousel fraud could apply to anything, and it could be that the Treasury will determine which goods will apply and the fraudsters will simply move on to another type of goods. Then there will have to be a further amendment and the fraudsters will move on again, so the measure will continually expand. There is, admittedly, a contrary argument, which is that the powers are broad and there is potential for abuse. Were the Government so minded, they could determine that almost any product could fall within the section and the reverse charge would apply. I acknowledge that there are contradictory pressures, but I should be grateful to hear about the Government’s attitude and whether the Paymaster General recognises that there are concerns in this area.

Jeremy Wright: I should start by declaring my interest as a non-practising barrister, and a more specific interest in that a few years ago I spent three happy months acting for somebody accused of precisely this type of fraud. I have some very personal knowledge of the difficulties involved in prosecuting this type of offence.

Mark Hoban: Who won?

Jeremy Wright: I am glad that my hon. Friend asks me that. It goes back to a point made by the hon. Member for Falmouth and Camborne. I am afraid that she is wrong that in such cases everybody gets convicted or everybody gets acquitted. In the case that I was involved with, a few people were convicted, but my client was not. As a point of information, I should make that clear. However, I should also say that, primarily because of that experience, I welcome the clause. It is a positive move on the Government’s part to deal with a difficult issue. As I said in my earlier intervention on my hon. Friend the Member for Rayleigh, there is no doubt that the Government could and should have been aware of the problem for a long time, but better late than never. I am glad to see that the clause has found its way into the Bill.
The provision is important because by reversing the obligation to pay VAT, we are likely to deter a large proportion of those frauds. That is important, because when such frauds come to court, they are extremely difficult to deal with. They are difficult to deal with, incidentally, not because juries do not understand them—I do not think that that is it at all—but because they deal necessarily with a complex paper trail.
The structure of carousel frauds is complex because their intention is to throw HMRC off the scent. A number of companies are involved, often in various countries, and—the Paymaster General is right about this—although every company in the chain is certainly involved in the fraud, not every person in every company has the necessary degree of criminal knowledge to be guilty of the offences concerned. That creates difficulties for juries, as it would for judges or other tribunals, in dealing with such cases. They are complex and inevitably long running. They involve mountains of exhibits and take a long time and a great deal of money to try. Anything that we can do to lessen the impact on the Exchequer through the legal aid budget and to improve the revenue that should be drawn in from such transactions seems worth while. In general, I welcome the clause.
I have two reservations, however, to which I draw the Paymaster General’s attention. I hope that she can assist me with some reassurance. Because the value of the clause, in my view, is to act as an effective deterrent on those who might be tempted to perpetrate such fraud, I should hope that it would have absolute clarity on where obligations for the payment of VAT lie. As my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) said, there is the potential for confusion not only in subsection (6), which indicates that the recipient must account for and pay tax on the supplier’s behalf, but in subsection (3)(a), which indicates that supplies are to be treated
“as taxable supplies of the recipient (as well as taxable supplies of the person making them)”.
I have no doubt that the clause’s overall purpose and effect are exactly what we all wish them to be. However, I ask the Paymaster General to put some reassurance on the record to make it perfectly clear where the obligations lie, so that no one tempted to perpetrate such a fraud could believe that the clause gives them any opportunity to continue.
I should also like to raise another matter touched on by others. A danger has arisen because of the prevalence of MTIC fraud that those legitimately involved in trading the types of product commonly used in such fraud—whether it be computer chips, mobile phones or other easily transferable components—can not only find it difficult to obtain banking facilities but can often find it difficult to obtain a VAT registration.
HMRC is understandably sceptical about companies wishing to trade in such products because of their prevalent use in illegitimate trading. I hope that the Paymaster General will indicate clearly that the methods used under the clause will make it easier for legitimate traders in such products to go about their business and obtain banking facilities and VAT registration, so that those important economic sectors can be sustained and improved.
I welcome the clause broadly, and I hope that with the Paymaster General’s reassurance, it can be strengthened yet further.

Brooks Newmark: My understanding is that tax advisers are also involved in intra-community fraud. In February it was reported that the Government were trying to tackle the problem through tighter regulation of tax advisers. However, John Whiting from Pricewaterhouse Coopers responded:
“we would be a little wary of suddenly appearing as agents of the Revenue. I can understand why the government might be looking at it, but is this trying to control a real problem? If the problem is bad tax advice, then there is a case for regulation. If the problem is that the government is losing money because people are finding a way around the tax system, we need clearer rules”.
In that context it would be useful if the Government explained how such proposals have progressed.

Dawn Primarolo: This is an extremely important debate and, within the confines of what I can say in public, I want to be as helpful as I can. I congratulate the hon. Member for Rayleigh on his introduction. The issue that we are discussing is complex and a challenge, not just for the UK Government, but other member states. I will try to cover all the points that he made.
I shall deal with the points that have just been made by the hon. Member for Braintree (Mr. Newmark). First, the Government are not asking tax advisers and solicitors not to provide advice. We are asking them not to provide advice and support for fraudulent activity. Clearly, that is what we are talking about. Secondly, I accept his second point about clarity, but that is true of all legislation and so it is necessary that it be as clear as possible.
I agree particularly with the points raised by the hon. Member for Rugby and Kenilworth (Jeremy Wright). Ideally, the provisions in the clause will deter fraudulent activities and address the difficulties that he so eloquently described. He made another important point: in a fraudulent chain of activity there might be individuals who find themselves subject to prosecution, but who had no knowledge, or did not have access to knowledge, of fraudulent activity. That is an important division—I will answer the hon. Member for Falmouth and Camborne in a moment—and comes back to the important distinction about with what we are trying to deal.
I shall address the points that have been made in the following order: the scale of the problem and the Government’s attempts to tackle it; issues involving other member states; and the safeguards that we are negotiating. I think that that will cover all the points that have been made, but if any Member disagrees, please intervene.
In 2001-02, HMRC identified the growing problem of MTIC fraud. The Finance Bill 2003 gave to Customs and Excise—now Her Majesty’s Revenue and Customs—not only powers to deal with the growing MTIC fraud, but a specific plan for its reduction. By 2004-05, losses from that fraud had been reduced from £2.5 billion in 2001-02 to the figures in the pre-Budget report of between £1.1 billion to £1.9 billion. A particular strategy was being deployed by the Department, which was successful.
We were reducing MTIC fraud by interventions on repayments. As a caveat, I should say that the tax administration is so fantastically efficient at repaying VAT promptly that that efficiency becomes part of the track. That is an interesting dilemma for us all as policy makers, as we strive to support business and make our tax administration sufficient, and is to do with the speed with which VAT is returned, particularly on export where the export company delays and the company that is claiming the VAT does so immediately. Without going too far down that route, hon. Members can see the dilemma. The first dilemma is to balance efficiency without creating a problem.

David Gauke: If the problem is the over-efficient and rapid repayment of VAT, has the Paymaster General considered giving it to the tax credits team?

Dawn Primarolo: Oh dear. I thought we were having a grown-up discussion. I am not going to answer the hon. Gentleman’s questions if he is going to be so unpleasant.

Mark Hoban: Will the Paymaster General give way?

Dawn Primarolo: Of course, as long as it is not about tax credits.

Mark Hoban: I refer back to the Paymaster General’s comments about the HMRC’s efficiency at repaying refunds. I understand that in one European country, the delay in paying refunds back to traders is such that it precludes MTIC from taking place. I am sure that that is a route that neither she nor the Government would want to go down, because I know a great many businesses benefit from the rapid repayments.

Dawn Primarolo: Indeed. The hon. Member for Rayleigh also asked me about the experience of other member states. That has certainly been a suggestion. I do not think that I am particularly attracted to that line of argument.
Figures have emerged, particularly of late, and it is right that I should refer to them. The hon. Member for Rayleigh asked what they were now. As the result of a decision in a case, which was touched on by the hon. Member for South-West Hertfordshire, part of the strategy that was being deployed for the MTIC challenges to the Department was no longer available to us. I have to put that delicately. As a result, the Department and I had to reconsider whether there were additional things we needed to do and what they were—I will come to them in a minute—and the reverse charge is part of that.
Fraud, by its nature, is difficult to measure. Because this is intra-community fraud, it relies on data from other member states to make estimates. The figures that we have seen cited recently, such as the ONS statistics, are for attempted fraud not stealing. I wish to draw a line—the figures that we have seen of late are truly staggering, and there is nothing to suggest that they are correct. I have given the figures already, but of course I acknowledge that the issue is growing and we need to move rather quickly.
With regard to what the Department is doing, first there are the arrangements in the Bill, including stamping and, in later clauses, the reverse charge. A reverse charge is difficult to put into VAT legislation. We are considering that and have applied for it on the basis of the challenge that faces us. Other member states—the hon. Member for Rayleigh asked me to touch on this—who also suffer considerably from MTIC fraud take a slightly different approach. We are going for a specific, limited reverse charge. Germany, for instance, wants a reverse charge in VAT legislation. However, our view, and I think that of Committee members, is that that would require much of small and medium-sized businesses and we are not attracted to it.
There is a great deal of discussion about the nature of a reverse charge. I have made the point clearly that the issue was not dealt with at the margins of the last ECOFIN meeting—I was there—but the Commission has been written to and I have raised the matter with other Ministers. We continue to press hard, because we believe that our solution of a limited reverse charge is the way forward. However, that requires the Commission to agree on how the charge would operate, and it has to be balanced within Community law. Naturally, the Commission is concerned with the same things as hon. Members: the impact on small business and not having excessive burdens. When the Commission has made a decision, it has to go to the Council and be passed with unanimity.
I want this process to take place as fast as possible. I included the proposed legislation in this Bill so that the Government would be able to bring it forward. However, the negotiations with the Commission on the detail are such that, although I can give the hon. Member for Rugby and Kenilworth (Jeremy Wright) the assurances he is looking for—we are striving for clarity, specificity, the target and not a general approach—the Commission is not attracted to that view. Those negotiations are still going on. I need to reflect on how I am able to keep him informed of developments.
Following the Bond case, we have deployed more than 1,000 staff to tackle the issue. The hon. Member for South-West Hertfordshire said that there was a staff shortage, but that is not the case. I also hark back to what the hon. Member for Rugby and Kenilworth said: the nature of this work is such that we need specialist skills, because it is detailed and about looking at material. In the meantime, extra staff have been deployed.

David Gauke: I am grateful to the Paymaster General. I shall not mention tax credits again. Does she accept, none the less, that there is at least a perception that there is a shortage of staff? There is a genuine concern going around a number of law firms, as I said earlier,Â about the time it takes to obtain VAT registration. Someone from the HMRC made the point to the correspondent that that seemed to be caused by a lack of staff. If that is incorrect, I should grateful for the Paymaster General’s comments.

Dawn Primarolo: I was coming to my next point. The question is about what the staff are doing. That touches on another principle that we need to consider. One of the requirements on the Department is to consider registration closely—who is seeking to register and whether registrations can be refused—I make it clear that I have asked it to do that. That task requires highly skilled staff and takes time, and there is the tension that the hon. Gentleman and the hon. Member for Rugby and Kenilworth rightly identified.
This is not the most desirable situation to be in, but, given the circumstances, we are using extra staff to question the huge amount of registrations, including new registrations. At the moment, that is one of the tools being used. However, the fraudsters then mutate their approach. They may find companies that are dormant or do all sorts of other things, so we also have to look carefully at where activity suddenly starts.
I want to be helpful, but I also want to be careful, because those who commit such fraud are advised and are very able people. There is therefore a limit to how much I can tell the Committee about the compliance strategy, although I am doing what I can.

Jeremy Wright: Would the Paymaster General accept that one of the ways in which we can deal effectively with the problems of registration and identifying those who should not have registration is to ensure that decisions on registration are taken as locally as possible, so that a degree of local knowledge can be applied in deciding which firms are likely to be legitimate and which are not?

Dawn Primarolo: I think that my answer is yes and no. Of course local knowledge is important and that can assist but, equally, businesses and those who represent them—the hon. Gentleman might have done this in his past life—want to be sure that consistent decisions are taken throughout the country and that there are no variations in decisions between local offices. The challenge—yet another to put on the table—is somehow to ensure both that that local knowledge is there and that central clarity and consistency provide for the other things that he suggested. That is quite difficult, because we are talking about discretions. There is a balance to be struck.

Julia Goldsworthy: Just so that I understand, will the new staff be based centrally or will they be deployed in the regions and closer to the local areas where there might be problems?

Dawn Primarolo: The staff are already deployed on the work. They do other work, but I shall come to that when I discuss the relationship with SOCA. The staff in the Department are highly trained investigators and compliance officers. They have important and unique skills in the analysis of financial transactions, and we need to ensure that that is reflected at every level.
The other area—here is the next balance to strike—concerns very large repayment claims. For instance, a company that appears to be trading on not very much might suddenly put in a VAT reclaim for £100 million. Then we are caught on the 30 days, as opposed to whether there are reasonable grounds to refuse payment or investigate it. Again, I make no apologies to the Committee, although there is a difficult balance to strike. I make it clear to the Department that I want it to proceed at every opportunity, because we are dealing with taxpayers’ money that should not be paid out. However, we are constrained by reasonableness, doubt and the issues that the hon. Member for Rugby and Kenilworth raises. These provisions are part of our attempts to disrupt the fraud and to bring pressure to bear to prevent the loss to the Exchequer, and the reverse charge needs to be a crucial part of that.
The hon. Member for Rayleigh asked about SOCA. I can give him a categorical yes—there is joint working. Those genuinely involved in MTIC fraud are also involved in many other things that would be of interest to SOCA and others. Therein lies a much greater danger. It is bad enough that revenue should be stolen from taxpayers, but the use to which such people put that money is also a concern. It is therefore right that there should be joined-up working on taking the issue forward.
I have spoken for a long time and am trying to be helpful, but perhaps I should conclude. More than90 per cent. of all the losses from MTIC fraud arise from goods that would be targeted specifically under the reverse charge mechanism. The hon. Member for Rugby and Kenilworth put his finger on it again: it tends to be small, high-value goods that can be circulated easily—but, of course, they are not circulated. There has been speculation in other member states that this may involve razor blades—and I heard somebody talk about patio heaters—but the nature of the stuff is that it is high value and circulates quickly.
The reverse charge needs to be a response to that. Part of the discussion with the Commission—without phenomenal powers being given, which all hon. Members think is undesirable in the reverse charge—is about the mechanisms with which the Government should respond should there be a mutation or change in the way that this fraud operates. The measure is intended to target what is happening now, give us some leeway and allow us to work within all the constraints that hon. Members have mentioned.
I cannot answer the question about bank accounts, because I do not have responsibility for that matter. We would hope that the business banking legal community in the UK would not be encouraging, facilitating or inadvertently helping such fraud in any shape. That banking sector in particular needs to consider carefully what else the individuals concerned may be perpetrating.
All Committee members can see that this matter is not only of concern to the Government, as one would expect. There is a huge challenge to the House of Commons in whether we have legislation deterring such activity and getting a grip on it.
I cannot give Committee members any further detail on the negotiations, but when the reverse charge is implemented, it will have been done in conjunction with wide, detailed discussion with business, which has responded favourably and is supporting us, but has put a number of principles on the table. I am happy to acknowledge those and can confirm that the Government will try to comply with them.

David Gauke: I intervene because I assume that the Paymaster General is about to sit down. I want to raise again the specific drafting point about subsection (6)—“on the supplier’s behalf”—and whether, in the event of the recipient not paying the VAT, the supplier may have some liability. My hon. Friend the Member for Rayleigh also raised that point. It might be helpful if some views were expressed at this stage.

Dawn Primarolo: I am sorry—it is unavoidable and I can see no way around it—but the supplier would be required to take reasonable steps to satisfy themselves that the customer is VAT-registered and the purchase is for business purposes. If the customer is VAT-registered and buys goods for the purposes of the business, it is the recipient’s responsibility to account for the VAT. If the customer fails to do so, there will be no liability on the suppliers. That will be a principle in respect of the requirements as well, if the Commission responds by saying that it want to see certain adjustments in the legislation. We will need to look carefully and see that the reverse charge does what we want but does not extend into areas that we would not want it to. I hope that I have answered all the questions.
On amendment No. 3 and the 2009 date, I should just say, frankly, that if the derogation is not time-limited anyway, and we have not implemented the provisions by 2009, well, forget it; in that case, the powers cannot be used. We are talking about derogations that are themselves time-limited. I put a reserve power in another clause because I am concerned to assure the House that the special power that I am asking for is specifically for the cases that I mentioned and will be time-limited. The hon. Member for Rayleigh did not need to table that amendment, but I did not feel that I needed to go to extreme lengths and say, “Well, I’m not going to do it.” I told the hon. Gentleman that the amendment that he did not move was completely unobjectionable, because it would do what we were going to do anyway.

Question put and agreed to.

Clause 19 ordered to stand part of the Bill.

Clause 20

Power to inspect goods

Julia Goldsworthy: I beg to move amendmentNo. 59, in page 23, line 32 [Vol 1], at end add
‘as required to be shown on the underlying tax invoice’.
Again, this is a probing amendment to seek clarification. It refers to proposed new sub-paragraph (2A)(b), where there is reference to
“power to record any information...relating to the goods that have been inspected.”
What does “information...relating to the goods” mean? What extra burden of paperwork and administration does it represent for businesses? Basically, under the amendment, we are trying to state explicitly that there should be the same information as is required and shown on a tax invoice; that might be a way to give businesses greater clarity on what information will be required of them.

Dawn Primarolo: The purpose of the clause is to put beyond doubt HMRC officers’ power when inspecting goods for VAT purposes, to evidence that inspection by applying a date stamp to the goods or their packaging, and to scan barcode information into a database. What the amendment would do—first and foremost and absolutely uniquely—is defeat the main purpose of the clause, which is that if it is the same goods circulating, and they are stamped and we have the barcode, that information will be provided. If the amendment prevents us from doing that, we have no power. The amendment therefore strikes at the very heart of how we are trying to deal with those issues in the clause. I hope that the hon. Member for Falmouth and Camborne will understand that we are talking about recording barcodes or information about the goods in a way that is acceptable to business, so that if the same goods come round again, we know it.

Julia Goldsworthy: I am grateful to the Minister for reassuring me that the information will be recorded in a manner acceptable to business. The issue was not just barcodes; the provision also mentions
“information (which may be obtained by electronic or any other means)”,
so my concern was that that would represent an unacceptable burden on businesses. However, as I have been reassured by the Minister that that will not represent an extra, unnecessary burden, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part ofthe Bill.

Mark Francois: We considered MTIC fraud in some detail under clause 19—and, in passing, I commend the Paymaster General for the detail that she gave in her reply. She did her best to respond to the points raised by my hon. Friends and me, within the confines that she faces, and I am grateful for that. I should like to press the Minister on some specific questions on the proposed powers to inspect goods before we allow clause 20 to stand part of the Bill.
We have received representations from a number of bodies about the measures in this brief but nevertheless important clause. For instance, the Institute of Indirect Taxation reacted to clause 20 as follows:
“We are concerned about the breadth of the new para 10 (2A). Our understanding is that HMRC only want to stamp the container or outside packaging and to scan any bar codes printed on the packaging. We fully appreciate the need for such powers”.
Nevertheless, the IIT goes on to say,
“However, the new sub-paragraph goes far wider than that. It will give customs powers to insist on goods being unpacked completely and then repackaged, at the taxpayers expense and to physically stamp the mobile telephone itself.”
Similarly, the Institute of Chartered Accountants in England and Wales, in its briefing note under the heading “The breadth of powers” states:
“The institute appreciates the value of this clause, as it will deter the multiple use of the same goods in MTIC frauds. Nevertheless, we are concerned that this clause goes far further than necessary, and contains insufficient safeguards. The clause effectively gives HMRC the power to have any goods (whether linked to MTIC fraud or not) completely unpacked and then marked.”
That is the institute’s view. I hear the Paymaster General dissenting, so I hope that she will clarify the situation. I was going to ask whether she could reassure us that the powers would be used selectively and only in appropriate circumstances, and whether she could provide that reassurance beyond doubt.
As well as the specific issue of MTIC fraud, there is the wider question of the deliberate smuggling of goods in order to evade payment of VAT and duties such as tobacco duty. My hon. Friend the Member for Wycombe (Mr. Goodman) dealt with tobacco duty in part 1 of the Bill, and I do not propose to cover that again now. However, this clause deals with powers to inspect goods.
On that point, Ministers might be aware that suggestions are circulating in some quarters to the effect that the Government are considering some kind of scheme for the marking of cigarette packets against counterfeiting and smuggling—perhaps something similar to the strip stamps on Scotch whisky. I see the ears of my friend from north of the border, the hon. Member for Dundee, East, pricking up.
That might range from simple marks that consumers can inspect to see that goods are genuine—but which risk being easy to counterfeit—to more complicated technologies for marking packets of cigarettes, which might be available to those with scanning equipment that can determine whether a packet of cigarettes is genuine and which could, theoretically, be used by HMRC inspectors in order to combat fraud.
I understand that discussions on the issue recently took place between the tobacco industry and HMRC. Bearing in mind that there was considerable discussion and consultation before strip stamps came in, can the Paymaster General say whether those discussions have progressed any further, whether there is any depth to them and whether the Government have any plans—even at an early stage—to mark cigarette packets in some way as an anti-fraud measure? Not least because of all the other changes that have taken place in relation to smoking in the past year or so, it is important to know what the Government have in mind.

Julia Goldsworthy: The Paymaster General went into great detail about the broader issues relating to clause 19, so I shall try to keep my remarks specific to clause 20. It is important for the combating of MTIC fraud that HMRC has the ability to enter premises and to inspect and, most importantly, mark the goods that they are inspecting. That is an important way to tackle fraud. In practical terms, that will involve date stamping and scanning bar codes to check that descriptions are correct.
As has been said, businesses have raised the concern that that could result in the goods being defaced or damaged. However, I understand that the Government have a dilemma. If they cannot mark the internal goods, there is nothing to prevent them from doing another round on the carousel. I seek clarification as to how HMRC will tread that tightrope and apply the law in a proportionate way. For example, will there be a full right to appeal at a VAT tribunal if it is considered that the goods and their value have been impaired as a result of their being marked in such a way? I shall be interested in further comments from the Paymaster General.

Stewart Hosie: I welcome clause 20, particularly the power in proposed new sub-paragraph (2A)(b)
“to record any information (which may be obtained by electronic or any other means)”.
We have heard that the cost might fall anywhere between £1 billion and £2 billion—perhaps up to£10 billion. It strikes me that it might well be necessary to seek a document with a full range of serial numbers for a carton of computer chips or other high-value items of the sort that we have been discussing to find out whether such goods are being passed down the chain in the criminal process. I welcome the measures, but I share some of the concerns about the proportionate use of the power.
I understand the point made by the hon. Member for Rayleigh about cigarettes. I know that very few hon. Members smoke, but I am led to believe that each cigarette packet has a stamp on the bottom. That might be sufficient without having to add a strip stamp, and he is absolutely right on that issue. It caused a great deal of consternation in the Scotch whisky industry, and I should like some comfort from the Paymaster General that in seeking to introduce machine-readable strips to avoid fraud, the Government will place no additional burdens on the Scotch whisky industry. The existing stamp will be sufficient.

Philip Dunne: I share some of the concerns raised earlier by the hon. Member for Falmouth and Camborne. The powers go way beyond the powers discussed in the previous clause, which dealt just with MTIC fraud. As I understand the clause, the powers will apply to the HMRC in any investigation that it wishes to undertake in relation to VAT fraud. Therefore, we need to look at the clause in the context of the supply of all goods across the country, not just those goods involved in the fraudulent carousel trade. In some respects, the powers go a step too far. I have no difficulty whatever with the power in proposed new sub-paragraph (2A)(b) relating to scanning bar codes. That is a sensible measure that will allow the Revenue to gain access to goods and record information about them.
Perhaps I should declare an interest by reminding Committee members that I am the chairman of a bookshop chain that benefits from a zero-VAT regime on the sale of books. However, we also sell other products, including greeting cards and some relatively high-value arts and art products, and that is where my concern arises. If they were marked by the industrious inspectors of the HMRC, could the marking damage the value of the products by damaging the products themselves?
One can imagine the same point applies to a number of other areas of which I have no direct experience, such as collectors’ stamps. If inspectors were to go around marking and defacing collectors’ stamps in the offices of Stanley Gibbons, they might destroy them. Actually, that might increase their value, because they would be specialist collector’s items if they had an official stamp.

Mark Francois: I take the opportunity at last to declare an interest. I do not smoke and I am not a lawyer, but I am a stamp collector.

Edward O'Hara: The hon. Gentleman got away with that.

Philip Dunne: My hon. Friend might wish to proffer a view on whether stamp prices would rise or fall if the stamps had been marked by the HMRC. I would not know.
The provision raises questions, which I hope the Paymaster General will address, about how the Revenue will interpret the powers. Should not some safeguards be introduced to prevent it from marking goods if that would damage their value?

Rob Marris: Can the hon. Gentleman envisage a number of goods besides stamps whose values could be harmed? For example, if Rolex watches were marked to prove that they were not counterfeit, surely that would enhance their value.

Philip Dunne: Having had the pleasure of travelling through a night market in Hong Kong relatively recently, I have seen arrays of watches of all kinds of luxury brands available. The hon. Member for Loughborough (Mr. Reed) is shaking his wrist to suggest that he might be wearing one. I suspect that the hon. Member for Wolverhampton, South-West might be right: in some cases, marking might help. I suspect also that the vast majority of such watches are for sale outside this country, so the HMRC would not have jurisdiction. I ask the Paymaster General to address those points.

Dawn Primarolo: As I said in my introductory remarks, the clause will simply put beyond doubt the right of the HMRC’s officers to evidence the inspection of goods and to make a record of any information relating to them. Under schedule 11(10) of the Value Added Tax Act 1994, they already have such powers. I do not know why hon. Gentlemen are suddenly so worried. Those powers are operating perfectly well. Although they are predominantly used to tackle MTIC fraud, their use is not limited to that area and never has been. I do not consider it necessary to restrict the scope in an area where it is already operating because to do so could undermine the HMRC’s existing rights to record information during routine VAT inspections.
Let us not run away with the idea that suddenly there are loads of extra powers; there are not. The HMRC’s officers already have the powers. The provision is to put the powers beyond doubt in what is a difficult area with regard to MTIC fraud. The powers go back to 1973, so they have existed for a long time.

Philip Dunne: The right hon. Lady has explained that the powers to stamp packaging already exist. Do they also exist to mark goods?

Dawn Primarolo: Yes, I believe so. The next issue is one that the hon. Gentleman raised, as did others. They painted a picture of an Armageddon in which huge amounts of goods would suddenly be unpacked, stamped and thus damaged. That would then be at the trader’s cost.
The requirements are no different from that those that exist for the inspection of goods under the current powers. The HMRC does not require access to individual product items to carry out the stamping and scanning. Hence, my point to the hon. Member for Falmouth and Camborne about the importance of needing to be able to scan the barcode and record such information. There is an HMRC date stamp on the outer packing of goods, such as boxes containing retail consignments of mobile phones. It is a matter to which we will need to pay careful attention, but it is dealt with at the moment.
I should not really answer the questions about cigarettes, but they are stamped and there is no extension to those powers either.
As I understand from my hon. Friend the Financial Secretary, there was much debate earlier in Committee about the memorandum of understanding with the industry. What is under discussion, which is of mutual benefit to the industry and to the Government, is the question of counterfeit goods and whether developments of technologies can assist the industry and us in dealing with the problem. With that clarification, I hope that members of the Committee will be satisfied with the clause.

Question put and agreed to.

Clause 20 ordered to stand part of the Bill.

Clause 21

Directions to keep records where belief VAT might not be paid

Question proposed, That the clause stand part ofthe Bill.

Mark Francois: The clause deals with the powers to direct the keeping of records when it is believed that VAT might not be paid. It is, in fact, a broadly drafted clause. It raises questions about where exactly to draw the line in seeking to achieve a difficult balance between, on the one hand, giving the HMRC sufficiently robust powers to tackle organised fraud, such as MTIC fraud, while, on the other, seeking to safeguard legitimate businesses from possibly unnecessary intrusion.
I said earlier that, on this clause, I would be raising the issue of safeguards and I hope that the Paymaster General can respond. Subsection (6) includes a very broadly drafted power to amend schedule 11 to the Value Added Tax Act 1994. It states:
"The Commissioners may direct any taxable person named in the direction to keep such records as they specify in the direction in relation to the goods as they so specify."
In fairness, that power is tempered to some extent by the wording of subsection (6)(3), which states:
“The Commissioners may not make a direction under this paragraph unless they have reasonable grounds for believing that the records specified in the direction might assist in identifying taxable supplies in respect of which the VAT chargeable might not be paid.”
Nevertheless, that remains a very broad power.
So can Ministers explain how they believe that that power will be exercised in practice? What safeguards will be put in place to ensure that in isolated cases over-zealous HMRC officials do not attempt to use that power as an opportunity to go on what is often referred to as a “fishing expedition”, or to seek to obtain all sorts of additional information about legitimate business under the auspices of combating VAT fraud?
Before the Paymaster General accuses me of crying wolf, I should point out that a number of professional bodies have also expressed concern about this issue and specifically about clause 21. The Institute of Indirect Taxation said:
“We would also point out that the only obligation on HMRC is to have reasonable grounds to believe that the records specified in the Direction might assist in identifying unpaid VAT. There is no requirement on HMRC to take any account of the burden that the Direction might impose on the business and no requirement even to weigh up such a burden against the potential loss of tax that HRMC is seeking to recover. We believe that they ought to be required to take account of both these factors. Furthermore because of the potentially draconian”—
its word, not mine—
“nature of these powers outside the context of MTIC fraud, we consider that the VAT and Duties Tribunal ought, on appeal, itself be entitled to consider not only the need to protect the Revenue, but also the need to avoid imposing burdens on a business that are disproportionate to the tax at risk.”
The Institute of Chartered Accountants in England and Wales went further. It said:
“The Government’s strategy should be to work with business and their representatives, the European Commission and other EU Member States to prevent MTIC fraud. This is unlikely to be achieved in the UK if we continue to pass legislation which makes honest businesses responsible for paying VAT misappropriated by others in the chain of transactions.”
It went on to quote a European Commission official’s letter published in the Tax Journal on 24 April 2004, which explained why the Commission had intervened against the UK in the Optigen case, which was referred to earlier by my hon. Friend the Member for South-West Hertfordshire. The Commission’s official, as quoted by the ICAEW, said:
“It is naturally necessary to take vigorous measures to combat tax fraud, but that objective does not justify making innocent bystanders pay for the crimes of others.”
The ICAEW concluded:
“As they stand, the provisions in clause 21 are likely to create further similar injustices, further court cases, and further defeats for the UK”.
To avoid doubt, I should emphasise that I am not in any way trying to denigrate the HMRC’s officials. Unfortunately, however, as Ministers will be aware, there have been problems in the past, particularly in what we used to know as Customs and Excise, which is now the HMRC. It lost a number of high-profile court cases, and many others collapsed. Subsequently, on occasions, there have been investigations into what went wrong by the Metropolitan police.
I do not propose to reprise that now, but my predecessor but one in this job, my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) got into considerable correspondence with the Financial Secretary over that issue and is familiar with it. So I am not seeking to over-egg the pudding, but I am making the point to Ministers that we know empirically that things have gone wrong in the past when Customs and Excise, in some respects, went too far. That being the case, we would like reassurances from the Paymaster General on how those powers will be exercised in practice. I hope that she will understand that I am trying to be responsible and not sensationalist.
In summary, and for the avoidance of doubt, I want to make it clear that we are committed to helping the Government combat fraud such as MTIC fraud. We appreciate that there is a genuinely difficult balance to strike. To some extent, Ministers are being asked to exercise the judgement of Solomon. However, given recent history, we want to ensure that the powers granted to the HMRC’s officials in part 2 of this Bill are proportionate, and that safeguards are in place to ensure that the powers will be exercised both reasonably and proportionately, not least in relation to this clause, so as not to disadvantage legitimate traders or adversely damage their business in the UK economy. I hope that that is a reasonable point to put to the Paymaster General, and I look forward to receiving some meaningful reassurances from her.

Julia Goldsworthy: Again, I stress that there are good intentions behind the clause, but I seek clarification on some areas. Does not existing legislation require record-keeping in all businesses? How does the clause extend HMRC’s powers? How does it meet the proportionality test of businesses? Does it ask companies to keep records not only on their own businesses, but, in some cases, on other businesses? Is it reasonable to ask them to do that? Of course it makes sense, when businesses are undergoing an appeal process, to have records to hand, but can the Minister confirm that the burden of proof will remain with HMRC rather than being shifted to businesses? Will there be a full right of appeal that will give the courts unfettered jurisdiction? Those are our key concerns about proportionality and record-keeping.
With respect to the penalty and the issue raised in proposed new section 69B(4) of the Value Added Tax Act 1994, what circumstances constitute changes to the value of the penalty? The paragraph mentions
“a change in the value of money”,
but how will the Treasury assess that? Will it be through simple indexation, or is it purely at the discretion of the Treasury to change the order of magnitude to whatever it considers appropriate? Those are the two key areas of concern that I would like the Minister to address.

Brooks Newmark: HMRC’s powers to direct a business to keep additional specified records are, as we have heard, extended by the clause. As my hon. Friend the Member for Rayleigh implied, the powers in the measure can be exercised only when HMRC has reasonable grounds to believe that the additional records might assist in identifying supplies on which VAT might go unpaid. The measure is intended to deter MTIC fraud.
HMRC began a wide consultation on its powers, deterrents and safeguards in March 2005 following its creation in the Commissioners for Revenue and Customs Act 2005, and the responses to the consultation were published in July 2005. A further consultation document was published on 30 March 2006, but neither document covers the specific proposals in the Bill. The Government could usefully explain why these measures have not been consulted on. A regulatory impact assessment has been published, however.
It might be useful if the Government explained why there is a need for legislation to make these changes, and why it would not be possible for HMRC to suggest that firms should keep records, as that would help them to defend themselves against accusations of MTIC fraud. They might also explain why those powers can be applied more widely than just to goods that are usually involved in MTIC fraud—primarily computers and mobile phones—and why it would not be wiser to restrict the power to those goods for the time being.

Rob Marris: I hope that my right hon. Friend the Paymaster General can help with this small point. I understand that subsection (6) would add paragraph 6A to schedule 11 to the Value Added Tax Act 1994. Paragraph 6(1) of schedule 11 already confers powers on HMRC to make regulations requiring records to be kept. What additional powers will paragraph 6A insert?

Dawn Primarolo: First, I want to assure the Committee that HMRC has no plans to use the powers for purposes other than to counter large-scale fraud, such as MTIC fraud. In that context, any additional burdens imposed under the measure are, in my view, entirely proportionate given the serious revenue losses that arise from such fraud. We had a constructive debate earlier on exactly what the challenges were.
I was also challenged by hon. Members to explain what the Government are doing now. The record-keeping requirement is part of that. It is a well-established principle that VAT must be administered in a proportionate fashion, so I turn first to the question whether the power is drawn too widely.
I have given the undertaking and made it clear that the power should be used specifically to combat large-scale fraud, such as MTIC fraud. It is totally impracticable to try to limit the scope of the measure by attempting to have a legal definition of MTIC fraud. Given everything that has been said about how it mutates and what the challenges are, I was a little taken aback that Members could flip so quickly from a discussion recognising the complexity of the challenge to providing a legal definition that says, “This is MTIC fraud; everything else you do is okay as long as you manage to legally get outside the definition.” In order for the clause to be effective, it needs to be applied in this way.
HMRC will have to demonstrate reasonable grounds to believe that additional records might assist in identifying supplies on which VAT might not have been paid. The whole purpose of the measure is to assist HMRC in detecting and challenging fraud, and that would be seriously undermined if HMRC had to prove knowing involvement in a specific fraud before using the direction, particularly given the point made by the hon. Member for Dundee, East. By the time HMRC had sufficient evidence to prove a fraud, the business concerns would be long gone. That is the nature of such fraud.
I want to deal with what constitutes reasonable grounds for deciding the direction, in practical terms. The Department will exercise its discretion carefully. It has to do so, as the area is complex and litigious. As the hon. Member for Rugby and Kenilworth pointed out, we can end up consuming huge amounts of resources for no gain and we have still lost the revenue. 
The main criterion is likely to be the previous involvement of the business or persons associated with the business in transaction chains that have led to a VAT loss through MTIC fraud. Anyone who receives a direction and does not believe that HMRC has acted reasonably in issuing it will have the right of appeal to the VAT and duties tribunal.
The direction would require the business to keep records that identify the goods it bought or sold, such as mobile phone serial or batch numbers, or the lock numbers for computer chips. The direction notice will set out clearly the records to be maintained. In order to apply the measure, HMRC must have reasonable grounds. I have explained what those reasonable grounds are and, given the magnitude of the problem that we want to deal with, that is entirely proportionate.
The final point was with regard to the penalty. The whole point of these clauses and the penalties that support them is not to use the penalties but to hope that they have a deterrent effect and that businesses keep better records in the first place to ensure that if they are in a sensitive area they can always demonstrate the facts of the case and that they complied with the legislation.
The scale of the fraud could be up to £1.9 billion of stolen VAT. It is theft, not business. It is like robbing a bank; it is just a different bank that they are robbing currently. They are doing it against the Exchequer. In the light of this, the level of penalty must be appropriate to act as a deterrent. I do not know whether £6,000 is high enough. However, within the range of penalties that the Department operates across the piece, that is the appropriate level and that is how we will back it up.
If businesses keep the correct records they always know to whom they have sold and from whom they are purchasing. If they have kept the batch numbers and they can demonstrate that, it helps to pave the way exactly to the point made by the hon. Member for Rugby and Kenilworth. Where somebody within a chain took all possible steps and could not have reasonably known, or have had access to the knowledge, and can demonstrate the facts with the records, it will take them outside consideration for MTIC fraud. That seems very important.

Stewart Hosie: The Paymaster General suggested that businesses should keep correct records of goods, numbers, customers and so on. That is reasonable. But in a previous debate it was suggested that tobacco manufacturers should not supply to people who they believe will smuggle; they should not supply to businesses, possibly illegal ones, which may then resupply to smuggling operations. Would it be reasonable under proposed new section 6A(1) for the commissioners to direct a company to keep records, not only of its immediate customers, but perhaps of the customers’ customers? That is the implication of the tobacco smuggling issue. If that became impossible, because a business simply could not identify it, and the commissioners thought that it was reasonable in order to try to stop major fraud, would the penalty then apply?

Dawn Primarolo: We are talking about an entirely different case here. As I made clear to the hon. Gentleman, the requirement for the direction to keep more records is because of involvement in, or suspected involvement in, a previous chain. This has operated perfectly well. The legislation depends and has depended in other areas on this definition of reasonableness and then the test at the tribunal. It is entirely appropriate in this area. The question that we still have to deal with as Members of this House, and I have to deal with as the Minister responsible for this area, is whether the combination of these clauses, the reverse charge and the increased activity, will have the required deterrent effect on MTIC fraud, or whether further steps will need to be taken. That is a matter that we can resolve only when we see the exact details of the reverse charge and the derogation we may be granted by the Commission.

Question put and agreed to.

Clause 21 ordered to stand part of the Bill.

Clause 22

Treatment of credit vouchers

Question proposed, That the clause stand part ofthe Bill.

Mark Francois: Very briefly—[Hon. Members: “Hear, hear.”] It is always nice to be cheered on in any context. The clause is perhaps more minor than some of the others that we have debated today. As the explanatory notes explain:
“The clause allows HM Treasury to amend schedule 10A to the Value Added Tax (VAT) Act 1994 by affirmative resolution order to specify circumstances in which the supply of credit vouchers is not to be disregarded for VAT purposes.”
In essence it is an anti-avoidance measure which appears to be aimed principally at attempts to redefine items such as phonecards as credit vouchers in order to minimise the VAT liability. The note goes on to stress that this is a limited power in that
“This power is intended to help combat VAT avoidance schemes which seek to exploit the fact that credit vouchers are not normally subject to VAT, and to discourage avoiders from implementing new schemes. This clause is also intended to leave businesses unaffected where they are not avoiding VAT: it does not change the basic credit voucher rules, but allows the Government to take targeted action against specific kinds of VAT avoidance, if the need arises.”
In that sense, the clause seems reasonable. This afternoon, we have been pressing the Government for reassurance on several areas, but on this occasion it is provided directly in the explanatory notes.
The Law Society has raised one minor technical matter; it has one small quibble. It has stated:
“We recommend that clause 22 makes it clear that HM Treasury cannot specify circumstances in which sub-paragraph (2) does not apply where transactions of the type in question have been the subject of a taxable supply in another Member State.”
Provided the Paymaster General can give a brief, snappy answer to that point, we have no objection to allowing the clause to stand part of the Bill.

Dawn Primarolo: Yes, I can give that assurance.

Julia Goldsworthy: Obviously, this is part of the sweep of clauses that we have broadly supported. I see no benefit in re-reading the explanatory notes to hon. Members, so I shall leave my comments at that.

Philip Dunne: Having read the explanatory notes, will the Paymaster General confirm that HMRC has no intention to start to levy VAT on book, CD or other retail vouchers? I ask that in view of my previously recorded interest.

Dawn Primarolo: Given the hon. Gentleman’s interest, I assure him that if he reads the clause, he will find that it is targeted at exactly where it says it is. If he needs any further clarification, I could send him a copy of the Labour party’s manifesto for the previous election, so that he can see exactly what the commitment was.

Question put and agreed to.

Clause 22 ordered to stand part of the Bill.
Further consideration adjourned.—[John Heppell.]

Adjourned accordingly at seventeen minutes past Four o’clock till Tuesday 16 May at half-past Ten o’clock.